Commentary

PennyMac IPO brings back subprime memories

Commentary: New era looks a lot like the old

BOSTON (MarketWatch) -- Call it another sign that fear is out, greed is back, and we have entered the new post-crisis era. Subprime Stan is back on Wall Street, after less than three years away.

Stanford "Stan" Kurland, the Countrywide Finance executive who pocketed more than $140 million at the expense of outside investors at the height of the subprime mania, has raised about $300 million from fresh investors for his latest venture -- trying to profit from the crisis.

His PennyMac Mortgage Investment Trust (PMT) made its stock-market debut last week.

True, the IPO only raised about half the $750 million originally planned. But it's still plenty. Add it to the $584 million that Kurland has raised from other investors, including BlackRock and Highfield Capital Management, and it gives him a war chest of around $900 million.

The name of the game: Distressed mortgages, particularly the kind of troubled subprime loans that Countrywide used to make.

Buy 'em cheap. Cut a deal with the homeowner. Make a mint.

Kurland knows the business well.

For many years, he was the No. 2 at Countrywide Financial, the nation's biggest mortgage provider. Unlike perma-tanned Chief Executive Angelo Mozilo, Kurland stayed out of the spotlight and under the radar.

Smart move.

Countrywide has since been revealed as ground zero for the subprime scandal. The company, now part of Bank of America, has been widely accused of controversial and reckless lending during the boom.

It has since struck settlements with 40 states to modify controversial loans. The settlements may be valued as high as $8.6 billion. The SEC has charged Mozilo with securities fraud and insider trading in a civil suit. There is a running scandal about friendly mortgages he provided to politicians. (Mozilo, through his attorney, has denied any wrongdoing).

At the height of the boom, the company was valued at $25 billion and was making pre-tax profits of more than $4 billion.

When the crisis brought about its collapse, it was sold to Bank of America
BAC, -0.39%
for scrap.

How did Kurland make out?

Pretty well. A review of all 173 of the company's Form 4 SEC filings shows that from 2003 through 2006 he sold stock to outsiders valued at $203 million, according to my calculations. After deducting stock-option costs, he netted a personal gain of $141 million, again by my calculations. Then he resigned quietly in October 2006 -- just before the roof fell in.

Those outside investors lost nearly all their money when the firm plunged into crisis.

Kurland has since said he was unaware of the scale of the problems at Countrywide while he was there. He declined to be interviewed for this article -- PennyMac is in its regulatory "quiet period" following the IPO. But in March, he and his pals persuaded the New York Times that he had tried to maintain decent lending standards at the mortgage giant. Indeed it was suggested that a dispute over this with Mozilo have been the reason he quit.

When I contacted PennyMac, Kurland's lawyer, David Willingham, responded: "Your column's thesis mischaracterizes Kurland's role at Countrywide and reflects a misunderstanding of what happened at the company. While we will not comment on specific regulatory and legal matters, Kurland has cooperated -- and will continue to cooperate -- with any enquiries. Kurland played by the rules in regard to all of his stock trades."

By the time he left, Kurland was president of Countrywide. He had been at the company 27 years -- 10 of them as chief financial officer, and 17 as chief operating officer. He was the chief executive of Countrywide Home Loans, the main operating subsidiary. Countrywide proxy reports show he was getting paid a base salary of more than $1 million, and a bonus of $7.9 million a year, during the boom. If he knew so little about what was going on, Countrywide investors must wonder why he merited so much money.

Don't just take my word for it. The PennyMac prospectus boasts that Stan Kurland "is well recognized for his leadership in developing Countrywide's strategic direction, financial management, risk management activities and organizational and governance structure."

As for playing by the rules in stock trades, any idiot knows how to do that. Sell early and sell often. Keep your hands clean by using an automated stock-sale program, and make no obvious, stupid moves -- like, say, ramping up sales just before a crisis breaks.

Kurland sold shares on more than 170 different occasions over a three-year period. No wonder a federal judge dismissed insider trading claims against him in a civil shareholder suit earlier this year.

But for a man who is now shocked -- shocked! -- by some of what went on at Countrywide, Kurland sure keeps funny company.

It's an all-star team. Anderson was previously at Lehman Brothers and Washington Mutual, both of which collapsed. John Lawrence was at IndyMac, ditto.

The $300 million question today: Would you hire Subprime Stan and the team to clean up the mortgage mess?

Anyone tempted to invest in PennyMac needs to look at the fine print first.

Shareholders' money will be used to buy up distressed mortgaged. Investors will take the risks. But they won't get all the rewards.

According to the PennyMac prospectus, these mortgages will be serviced by an outside firm, PennyMac Loan Services LLC. That firm is owned by Kurland and his pals, BlackRock and Highfield. They will collect between 0.3% and 1% a year on the unpaid balances of each mortgage purchased. They will also collect "certain customary market-based fees and charges, including boarding and deboarding fees, disposition fees, assumption, modification and origination fees and late charges, as well as interest on funds on deposit in custodial or escrow accounts."

PLS will also get 1% plus $750 for loans it refinances.

The fees don't stop there. Another 1.5% will go each year to another outside firm, PNMAC Capital Management. That, too, is owned by Kurland, his pals, and BlackRock and Highfield.

And they will also be entitled to a performance fee as well: one-fifth of all earnings over $1.60 a share (That's 8% of the $20 issue price).

The fine print also explains another wrinkle: When calculating whether the fund has earned the necessary profits, the company will ignore the costs of any stock and options in the trust that it grants to staff and executives.

Sweet.

Officers, trustees and employees are already in line for 375,330 restricted share units, worth about $7.5 million, following the IPO. The prospectus says they may, in total, get much as 8% of the entire trust in due course, worth $24 million.

It will be fascinating to see how far the costs of PCM and PLS add up. When Kurland was at Countrywide, public filings show, he even billed the company for his personal use of the company jets and for golf club memberships. Indeed, in 2004 his personal use of planes cost Countrywide stockholders $55,541. His country club memberships cost them an almost unbelievable $221,978.

Kurland, his team, BlackRock and Highfield are investing a total of $15 million in the trust themselves. As this only represents part of their economic interest in the entire process, it only provides some reassurance for the sake of stockholders.

Kurland and his team may do very well out of PennyMac. Whether outside investors do anything like as well will be another matter.

Welcome to the new era on Wall Street. Is it just me, or does it look a lot like the old era?

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